Most-Profitable Forex Formula

You may have heard that only 5% of all foreign-exchange traders make money. This statistic is not only wrong, but also completely misleading.

In reality, 20-30% of all forex traders are profitable, which is better, but still not high enough for most of us to try our hand.

But let me share a little secret with you — in Hong Kong, approximately 50% of all forex traders are profitable. And there’s a way that you can boost those odds to 61%.

Their success has nothing to do with Tiger Moms, but rather one very simple reason — leverage. It allows you to control a larger trading position than your actual available capital – using, for instance, $10,000 to control a $100,000 position (10-to-1 leverage).

Don’t be mistaken, the Chinese love get-rich quick schemes. There’s a reason why Macau is the world’s gambling capital! So they were quick to appreciate the attractiveness of leverage.

Foreign trading can be enhanced through leverage plays, but only those in which you are confident.

However, the Securities & Futures Commission of Hong Kong was smart – very early on it limited leverage to 20-to-1 and required an initial margin of 5%.

During this time, leverage in the U.S. was as high as 100-to-1, and to this day you can find brokers outside of the U.S. offering leverage as high as 400-to-1.

In 2010, U.S. regulators finally woke up to the danger of leverage and reduced it to 50-to-1 (2% margin) for major currencies and 20-to-1 on minor currencies.

Leverage is a double-edged sword. In reality, currencies do not move as much as equities. On a given day, a 2% move in the euro/U.S. dollar pair would be significant, whereas stocks can easily swing 5-10% a day. The ability to control a significant amount of money for only a fraction of an investment is extremely attractive. And when the moves are in our favor, 50-times lever is great. But when it moves against us, leverage can compound the losses and in some cases wipe out our accounts.

“The ability to control a significant amount of money for only a fraction of investment is extremely attractive.”

Since 2010, the forex market has changed, but the stigma remained because after the 2008 financial crisis, there was less appetite and fewer discretionary funds for alternative investments. During this time, the forex market remained a favorite of hedge funds, institutional investors and central banks and continued to grow. Now more than $5 trillion changes hands every single day in the forex market, making it single-handedly the largest market in the world.

Thankfully, how much margin we post and how much leverage we use is a choice. I always recommend no more than 5-times lever and that’s only on your most confident positions.

One of the largest forex brokers in the world recently conducted a study of 13 million trades, and it confirmed that leverage has a negative relationship with profitability. According to the study, “Traders were considerably more likely to turn a profit on a given trade than a loss except when using over 25:1 leverage. Trades with leverage below 5:1 were profitable 61 percent of the time. On the opposite end, those with effective leverage above 25:1 were only profitable on 48 percent of all trades–a significant difference.”

So as you can see there’s no real secret to the success of Hong Kong forex traders. Use lower leverage and you’ll automatically gain an edge.

Happy trading!

Kathy Lien

Other Developments of the Day

SeaWorld said that it will end its killer whale breeding programs amid criticism that the practice was detrimental to the orcas. It said the 24 orcas it currently has in three parks would be SeaWorld’s last generation. The company has been under pressure about its orcas since the 2013 documentary “Blackfish,” which argued that placing the whales in captivity made them violent, neurotic and decreased their life span.

Nike Inc. (NKE) is introducing its first “self-tying” sneaker, which allows wearers to adjust the fit looser or snugger on the run by pressing buttons on the side of the shoe. The innovation comes as Nike is digging deeper into personalized products and services. It has a goal of reaching $50 billion in annual revenue by the end of 2020 from the $30.6 billion for its most-recent fiscal year.

Billionaire Li Ka-shing, one of the biggest foreign investors in the U.K., said he’d scale back investments from the country in the unlikely event that Britain exits from the European Union, Bloomberg reports. “If ‘Brexit’ really happens, we will surely decrease our investments,” CK Hutchison Holdings Ltd.’s chairman told a press briefing. “The possibility of Brexit is small if British people care about their own interests.” Voters will decide on the U.K.’s future in the EU in a referendum set June 23.

The Money and Markets team

{10 comments }

AlThursday, March 17, 2016 at 6:06 pm

The Brits. are putting up a good show in order to get more out of the EU, however, their is only a very slim chance the UK will actually “Brexit”. The refugee situation brought the possibility of “Brexit”, yet the Brits are the least effected.

hawk 5000Friday, March 18, 2016 at 1:09 am

kewl

JoeThursday, March 17, 2016 at 6:12 pm

All this sounds great for large institutional traders. but it is meaningless for the average middle class Joe because most of us are overburden with credit card and mortgage debts and the free spending capitalist society is not helping us either as many consumers are overspending their revenue stream and borrowing on credit. I believe if China becomes a consumer economy, the loan sharks from the credit lender companies will swoon in to take a piece of the consumer debt pie in growing economy countries. I would be interested only in derivitive investment markets from credit lending institutions like AMEX, VISA, or other global credit lending financial corporations who is going heavily into growing economies like China and other south east asian countries. Credit lending institutions never lose money because they profit on interest earned from credit spenders, which is growing at astronomical rates in south east asia and the 5 tigers nations as they are trying to copy the North American free spending economy..

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John Duncan InnesThursday, March 17, 2016 at 6:15 pm

The EU is a dictatorship of bureacrats that will eventually lead to a civil war as citizens object.
The UK in contrast was a democracy since its civil war and Brexit is the only way to keep it.
Although our politicians lie again – if you do not learn from history you are doomed to repeat it

GordonFriday, March 18, 2016 at 2:30 am

Watch David Cameron he is promoting tax cuts for business and the rich and reduced spending on the poor and disenfranchised. He wants to cut transfers to councils and many other things that hurt the poor and help the rich. First rule of order Conservatives/Republicans are NOT there to help the poor ONLY the rich.

ScottFriday, March 18, 2016 at 3:34 am

If you wish to keep any form of sovereignty, currency or freedom there simply must be a brexit. Do not be fooled, the politicians will lie through their teeth in order to get what is best for themselves not the populous. Why would you want to be ruled by an unelected bureaucrat in Brussels? Wake up people!!

Lifestudent38Friday, March 18, 2016 at 5:02 am

“Becoming an overnight success is easy, all it takes is 10 years of hard work” – Unknown. The drawback to leverage trading is its promise of turning traders into millionaires in a relatively short time span, an element that was sold fairly easily to the shortcut- quick fix mentality in human nature. Use of lesser leverage may slow down the growth of successful trading account but one does not go broke by being profitable, even if it means obtaining a million dollars only in 10 years time!! I am fully supportive of using less leverage.

WaltFriday, March 18, 2016 at 7:05 pm

So, I am not sure I “get” the real point of this article, or perhaps it’s motive. Where I am confused is that the author is simultaneously trying to “sell” their Global Currency Investor service by touting 1400+, 1500+, 1600+ and even 2000+% gains using multiple highly leveraged investments.
Does the author somehow claim immunity from inclusion in the statistics cited in this article?

Warren ColeSaturday, March 19, 2016 at 10:13 pm

For a single trade it’s not the leverage. If a trader chooses to put say 2% at risk on a trade the leverage has nothing to do with it. Greater leverage does allow the trader to put on more trades thus putting a greater percentage of the account at risk at one time.
If a major event blows all the trades at once this could hurt.

david abbottMonday, March 21, 2016 at 5:11 am

Would the US stay in Nafta if it insisted on the free movement of people? No point in a wall along the border.
The EU insists on free movement 500 million people legally living in the EU. And when Turkey joins there will be another 76 million. And it costs Britain 80 million dollars a day to belong. Brits would be mad not to take this once in a lifetime chance of leaving.